Business Concepts and Financial Metrics

A complete set of vocabulary flashcards covering key business metrics, market analysis, operations, competitive strategy, unit economics, and corporate valuation from the lecture notes.

TAM

Total Addressable Market; the total theoretical revenue opportunity if a company captured 100% of the market.

SAM

Serviceable Addressable Market; the portion of TAM the company can realistically serve based on its business model, geography, and capabilities.

SOM

Serviceable Obtainable Market; the portion of SAM the company can realistically capture given competition, resources, and capabilities.

CAGR

Compound Annual Growth Rate; annualized growth rate over a period assuming steady compounding: $(\text{Ending Value} / \text{Beginning Value})^{(1/n)} - 1$.

Market Penetration

Current users or customers divided by potential users or customers; used to determine how much of the potential market has adopted a product.

Market Share

Company sales divided by total market sales; used to determine a company’s competitive position within a market.

Market Segmentation

Breaking a market into groups based on customer, product, geography, demographics, behavior, or use case; used to identify where the best opportunities exist.

Barriers to Entry

Factors that make it difficult for new competitors to enter a market; examples include capital requirements, regulation, intellectual property, brand, scale, switching costs, and network effects.

Substitutes

Alternative products or services that satisfy the same customer need; analyze relative price, value, and availability to assess competitive pressure.

Willingness to Pay

Maximum price a customer is willing to pay for a product; influenced by perceived value and price sensitivity.

Customer Frequency

Purchases or transactions per customer over a period; used to understand how often customers buy or use a product.

Retention Rate

Percentage of customers retained over a given period; used to measure customer loyalty and recurring revenue.

Churn Rate

Percentage of customers or revenue lost over a given period; used to measure customer attrition.

LTV

Customer Lifetime Value; total net profit a company expects from a customer over the entire relationship; commonly driven by revenue per customer, gross margin, and customer lifetime or churn.

CAC

Customer Acquisition Cost; sales and marketing spend divided by new customers acquired; used to assess how expensive it is to acquire customers.

LTV:CAC

Ratio comparing customer lifetime value to customer acquisition cost; used to evaluate the health of customer unit economics.

AOV

Average Order Value; total revenue divided by number of orders; used to measure average spend per transaction.

ARPU

Average Revenue Per User; total revenue divided by number of users or customers; used to measure monetization per customer.

Customer Profitability

Revenue per customer minus the variable costs associated with serving that customer; used to determine which customers or segments are most profitable.

Customer Concentration

Share of revenue generated by a small number of customers; used to assess dependency and customer risk.

Switching Costs

Costs or barriers customers face when changing providers; used to assess retention, customer stickiness, and competitive advantage.

Revenue

Total money generated by selling products or services; most commonly analyzed as $\text{Price} \times \text{Volume}$.

Revenue Growth

Percentage increase in revenue over a period; used to determine how quickly the business is expanding.

Mix

Relative composition of products, customers, geographies, or channels; used to determine whether a shift toward higher- or lower-value segments is affecting revenue or margin.

Recurring Revenue

Revenue that repeats predictably, such as subscriptions, contracts, renewals, ARR, or MRR; used to assess revenue stability.

Conversion Rate

Successful outcomes divided by total opportunities; used to measure how effectively leads, traffic, or prospects become customers.

Gross Margin

$\frac{\text{Revenue} - \text{COGS}}{\text{Revenue}}$; measures profitability after direct production costs.

Operating Margin

$\frac{\text{EBIT}}{\text{Revenue}}$; measures profitability after operating expenses but before interest and taxes.

Net Margin

$\frac{\text{Net Income}}{\text{Revenue}}$; measures profitability after all expenses, including interest and taxes.

Contribution Margin

Revenue per unit minus variable cost per unit; amount available to cover fixed costs and profit.

Contribution Margin %

Contribution Margin divided by Revenue; used to measure the percentage of each dollar of revenue available to cover fixed costs and profit.

Fixed Costs

Costs that do not change with production volume in the relevant range; examples include rent, salaries, and certain overhead.

Variable Costs

Costs that change with production or sales volume; examples include raw materials, shipping, commissions, and per-unit labor.

Total Cost

Fixed Costs + Variable Costs; used to calculate overall cost of operating or producing.

Variable Cost per Unit

Total variable costs divided by units produced or sold; used to calculate contribution margin and break-even.

Break-even Point

The sales volume or revenue at which total revenue equals total costs and profit equals zero.

Break-even Volume

Fixed Costs divided by Contribution Margin per Unit; number of units required to reach zero profit.

Operating Leverage

The degree to which a company’s cost structure is fixed versus variable; higher fixed costs make profit more sensitive to changes in revenue.

COGS

Cost of Goods Sold; direct costs attributable to producing goods or services sold.

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization; commonly used as a measure of operating profitability.

EBIT

Earnings Before Interest and Taxes; operating profit.

CapEx

Capital Expenditures; money spent acquiring or upgrading long-term physical assets.

OpEx

Operating Expenses; day-to-day business costs that are generally not directly tied to producing each unit.

Free Cash Flow

Cash available after operating needs and capital expenditures; commonly simplified in cases as EBITDA - Taxes - CapEx - Change in Working Capital.

Working Capital

Current Assets - Current Liabilities; measures short-term operating liquidity and cash tied up in the business.

Profitability Tree

Profit $\rightarrow$ Revenue - Costs; Revenue $\rightarrow \text{Price} \times \text{Volume}$; Costs $\rightarrow$ Fixed + Variable; used to diagnose why profitability changed.

Capacity

Maximum output a facility, machine, employee base, or process can produce over a given period.

Capacity Utilization

Actual Output / Maximum Possible Output; used to determine how much available capacity is being used.

Productivity

Output / Input; examples include output per employee, hour, or machine; used to measure operational efficiency.

Throughput

Amount of output produced per unit of time; used to measure process capacity and operational performance.

Bottleneck

The constraint in a process that limits overall throughput or capacity; improving it can increase total system output.

Cycle Time

Time required to complete one unit or one step in a process; used to identify process inefficiencies and capacity constraints.

Yield

Good Output / Total Input; used to measure how much usable output is generated from inputs.

Defect Rate

Defective units divided by total units produced; used to assess quality and identify waste or rework.

Downtime

Time that equipment or capacity is unavailable; used to determine lost production capacity.

Inventory Turnover

COGS / Average Inventory; measures how many times inventory is sold and replaced over a period.

Days Inventory Outstanding

Average Inventory / COGS $\times 365$; estimates how many days inventory remains before being sold.

Lead Time

Time between placing an order or beginning a process and receiving the output; used to assess supply-chain speed and responsiveness.

On-Time Delivery

Percentage of deliveries completed on or before the promised date; used to measure supply-chain reliability.

Fill Rate

Percentage of customer demand fulfilled immediately from available inventory; used to assess product availability.

Sales Funnel

Leads $\rightarrow$ Opportunities $\rightarrow$ Wins; used to diagnose where customers are being lost in the sales process.

Win Rate

Deals won divided by total opportunities; used to measure sales effectiveness.

Sales Cycle

Average time required to convert a prospect into a customer; used to assess sales efficiency.

Sales Productivity

Revenue or deals generated per salesperson; used to assess sales-force effectiveness.

Sales Pipeline

Total value or number of potential deals at different stages of the sales funnel; used to forecast future sales.

Marketing ROI

Incremental profit or contribution generated by marketing divided by marketing spend; used to determine marketing effectiveness.

Brand Awareness

Percentage of target customers aware of a brand; used to assess brand strength and marketing reach.

Engagement

Customer interaction with marketing or a product, such as clicks, time spent, or interactions; used to assess customer interest.

Channel Economics

Revenue, costs, margins, fees, commissions, and CAC by sales or distribution channel; used to determine which channels are most attractive.

Competitive Position

Market share, price, product, capabilities, costs, distribution, and brand relative to competitors; used to determine whether the company can win.

Competitive Response

Likely competitor actions such as price cuts, new products, capacity expansion, or increased marketing; used to assess strategic risks.

Competitive Advantage

A structural reason a company can outperform competitors; examples include cost advantage, differentiation, brand, scale, switching costs, and network effects.

Product Differentiation

The ways a product is meaningfully different from competitors, including features, quality, service, technology, brand, and convenience.

Product Mix

The relative share of sales from each product or category; used to assess how product composition affects revenue and margins.

Cannibalization

When sales of a new product reduce sales of an existing company product; used to calculate the true incremental impact of a launch.

Economies of Scale

Cost advantages gained as production volume increases, lowering average cost per unit.

Economies of Scope

Cost advantages from producing multiple related products or services together rather than separately.

Synergies

Incremental value created by combining two businesses; usually categorized as revenue synergies or cost synergies.

Revenue Synergies

Additional revenue created by a combination, such as cross-selling, higher prices, new customers, or new channels.

Cost Synergies

Cost savings created by a combination, such as procurement savings, headcount reductions, facility consolidation, technology savings, or distribution efficiencies.

Vertical Integration

A company expanding into another stage of its supply chain, such as a manufacturer acquiring a supplier or distributor.

Horizontal Integration

A company acquiring or merging with a competitor at the same stage of the supply chain.

Strategic Fit

Degree to which a potential strategy aligns with the company’s customers, market, products, capabilities, and competitive position.

Company Capabilities

Assets and competencies the company can leverage, including brand, technology, people, distribution, capital, data, IP, processes, and relationships.

Market Entry Economics

Revenue, costs, initial investment, margins, ROI, NPV, payback, and other financial returns from entering a market.

Market Entry Options

Build organically, acquire, partner, license, or form a joint venture; used to determine how the company should enter.

Growth Levers

Existing customers, new customers, existing products, new products, new geographies, new channels, pricing, and M&A; used to identify ways to grow revenue or profit.

Pricing Analysis

Customer willingness to pay, price elasticity, competitor prices, costs, desired margin, and strategic positioning; used to determine the optimal price.

Price Elasticity of Demand

% change in quantity demanded divided by % change in price; measures how sensitive demand is to price.

M&A Rationale

Reasons to acquire a company, including growth, market entry, customers, products, technology, talent, vertical integration, or eliminating competition.

M&A Deal Economics

Purchase price, valuation multiple, financing, synergies, integration costs, returns, and payback; used to determine whether an acquisition creates value.

ROI

Return on Investment; $\frac{\text{Gain from Investment} - \text{Cost of Investment}}{\text{Cost of Investment}}$; used to compare the return generated by an investment with its cost.

ROIC

Return on Invested Capital; $\frac{\text{NOPAT}}{\text{Invested Capital}}$; used to measure how efficiently a company generates returns from invested capital.

ROE

Return on Equity; $\frac{\text{Net Income}}{\text{Shareholder Equity}}$; used to measure profitability relative to shareholders’ capital.

ROA

Return on Assets; $\frac{\text{Net Income}}{\text{Total Assets}}$; used to measure how efficiently a company generates profit from its assets.

NPV

Net Present Value; present value of future cash flows minus initial investment; positive NPV generally indicates value creation.

IRR

Internal Rate of Return; the discount rate at which a project’s NPV equals zero; used to compare investment returns with a required return or hurdle rate.

WACC

Weighted Average Cost of Capital; blended required return across debt and equity; commonly used as a discount rate in valuation.

Payback Period

Time required for an investment’s cash flows to recover the initial investment; used to assess how quickly capital is recouped.

Enterprise Value

Market Capitalization + Debt - Cash; represents the value of a company’s operations independent of capital structure.